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Banning M2M: The Worst Mistake in History
Yesterday the house Financial Services Subcommittee run by Paul E. Kanjorski (D-PA) discussed mark-to-market accounting.
Why do you care? Some misguided wicks out there (i.e. Warren Buffett and Steve Forbes) have asked for the M2M (yes, we have a silly text friendly symbol for mark-to-market now, twitters rejoice!) to be banned. On one hand I say yes, but only if it applies to me as well. It would allow me to ask my clients to stop using their current portfolio balances and simply use the balances from 2007. This would make me look spectacular, my referrals would shoot though the roof, and nobody would call concerned about the future of their retirement. The problem with this is that it is a fraud. People seeking to ban the M2M rule are asking the investing public to support the next great Ponzi scheme. The only difference in this scenario is that trades are placed and the money is invested in bank debt.
Now that I have everyone worked up, let’s take a step back to remind ourselves why this is important. While most banks don’t have large amounts of debt subject to M2M rules, the big guys (BAC, WFC, JPM, C) have a serious issue with it. Why? They borrowed money to make dangerous investments that have not worked out. There is nothing illegal with incompetence or making bad bets. However, now they are upset because the M2M exposes their incompetence. At least they all were doing it, right?
Banks need new money all the time, and they get that by convincing investors that if they buy their debt now, they will be paid back in the future. Investors want to see the true value of the assets, including the bad debt. Remember that junk still has some value, but you can’t let management lie to you about it. That is what they are asking the government to do right now: legally hide the current value of their mistakes. I would consider lending to banks as an investor, but you have to come clean and show me the books. If not, I will take a pass. If this happens on a wide scale by banning the M2M rule, we could freeze the credit markets all over again.
Now, for those conspiracy theorists out there, listen up. Could banning the M2M rule, thus causing a new credit freeze, make it easier for banks to beg the Fed to give them more free money? I don’t think it is that evil. My take is that the big banks just want to cover up their tracks while they collect a handsome spread on the free money the Fed is lending them right now “in their time of need.” They should be careful about what they ask for. Their cure could kill them.
Citi Appoints Eric Aboaf Treasurer
NEW YORK, Apr 06, 2009 (BUSINESS WIRE) -- Citi today announced that Eric Aboaf has been appointed Treasurer of Citigroup, reporting to Chief Financial Officer Ned Kelly.
Mr. Aboaf will manage Citi's balance sheet and will be responsible for ensuring strong liquidity, asset and liability management and optimization of our capital structure.
He will work closely with all of Citi's businesses within both Citicorp and Citi Holdings to support their funding needs and optimize capital deployment. Mr. Aboaf will also work closely with external regulators and rating agencies. He will communicate with and expand our base of fixed income investors.
"Eric brings invaluable experience as CFO of both our major businesses to the role of Treasurer as we seek to more fully integrate Treasury with our businesses as well as Risk," Mr. Kelly said.
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Citi Appoints Mike Corbat CEO of Citi Holdings
NEW YORK, Apr 06, 2009 (BUSINESS WIRE) -- Citi today announced that Mike Corbat has been named CEO of Citi Holdings, a significant part of Citi that includes brokerage and asset management, local consumer finance and a special asset pool. Mr. Corbat has served as interim CEO since Citi's announced realignment into Citicorp and Citi Holdings on January 16, 2009.
In this role, Mr. Corbat will continue to work closely with newly appointed Citi Holdings Chairman Gary Crittenden to thoughtfully evaluate and set the strategic course for these businesses, while tightly managing risks and losses and maximizing the value of these assets.
Mr. Crittenden said, "Mike Corbat is a terrific business manager and a great partner. In a short time, Mike and the team have done excellent work, and I couldn't be more pleased to have him move into the CEO role on a permanent basis."
"With more than 25 years at Citi in a variety of leadership roles, Mike brings a tremendous amount of experience, insight and energy to this post," said Citi CEO Vikram Pandit. "Mike will work closely with us to accelerate our assessment of strategic opportunities for these businesses, as we also seek to optimize their performance through this challenging market environment."
Originally posted by Hx3_1963
It's up...no...it's down...
[edit on 4/6/2009 by Hx3_1963]
Mayo Says Loan Losses Will Exceed Depression Levels (Update1)
April 6 (Bloomberg) -- Mike Mayo, who left Deutsche Bank AG to join Calyon Securities, assigned an “underweight” rating to banks on expectations that loan losses will exceed levels from the Great Depression.
“While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class,” Mayo wrote in a report today. “New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.”
The 46-year-old Mayo gained a reputation for independence at Deutsche Bank for his willingness to put a “sell” rating on banks and to criticize investors and companies for trying to curb objective analysis. At Deutsche, Mayo had “sell” or “hold” ratings on all 18 companies he covered, according to data compiled by Bloomberg.
Mayo said in the report that he expects loan losses to increase to 3.5 percent by the end of 2010. Mortgage-related losses are about halfway to their peak, while credit card and consumer losses are only one-third of way to their expected highest levels, Mayo wrote.
The changes to mark-to-market accounting rules will impact banks’ balance sheets by one-third or less and will have no impact on the economics of bank troubles, Mayo wrote. Banks committed the “seven deadly sins” of banking in trying to compensate for lower natural growth rates and will now feel the costs of those actions, Mayo wrote.
Mayo gave “sell” ratings to BB&T Corp., Fifth Third Bancorp, KeyCorp, SunTrust Banks Inc. and U.S. Bancorp, while “underperform” ratings were assigned to Bank of America Corp., Citigroup Inc., Comerica Inc., JPMorgan Chase & Co., PNC Financial Services Group Inc. and Wells Fargo & Co.
Major indexes fell more than 1 percent at the open, with the Nasdaq leading the way, following remarks from a prominent analyst who said financials face tough sledding ahead.
The move lower comes after stocks posted their best four-week gains in more than 75 years.
Fed buys $2.5 billion in long-term Treasurys
NEW YORK (MarketWatch) -- The Federal Reserve Bank of New York bought $2.5 billion in Treasurys on Monday, part of a program to improve conditions in private credit markets and spur lending. The debt bought included notes maturing between 2019 and 2026. Dealers submitted $11.6 billion in debt to be purchased. The Fed will continue its buybacks this week, heading towards purchasing $300 billion in Treasury securities over the next six months. Ten-year note yields declined 2 basis points to 2.88%.
The Federal Reserve on Monday lined up hundreds of billions of dollars worth of euros, yen, pounds and swiss francs to lend to US banks as needed to meet their foreign currency needs.
The US central bank entered into currency swap agreements with the European Central Bank, the Bank of Japan, Bank of England and Swiss National Bank to secure access to up to E80bn, Y10,000bn, GBP30bn and SFR40bn.
The Fed has already authorised these four central banks to borrow unlimited amounts of dollars from it to meet the dollar funding needs of their local banks.
The Fed is not immediately drawing on the new foreign exchange swap lines.
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Gold falls below $870 on possible IMF gold sales, rising dollar
NEW YORK (MarketWatch) -- Gold futures fell Monday for a third straight session to below $870 an ounce, wiping out their yearly gains as traders shaved positions on worries that the 403 tons of gold sales by the International Monetary Fund will increase supply and depress gold prices.
"There is still this fear of a lot of selling coming from different central banks and the IMF," said George Gero, a precious metals trader for RBC Capital Markets. "The perception is that 'I am getting out of the way until all the sales are completed and let's see how it's absorbed.'"
Gold for April delivery fell $27.40, or 3.1%, to $868.20 an ounce in North American electronic trading. Gold has lost more than 6% since April 1 and is now down nearly 2% for the year. The more active June contract also fell Monday, down 3.2% at $868.50.
Leaders from the Group of 20 nations said last Thursday they endorse 403 tons of gold sales by the IMF. The proceeds will be used to provide finance for the poorest countries over the next two to three years.
The announcement came one day after the European Central Bank said it had completed the sale of 35.5 tons of gold.
The IMF's plan to sell the gold still needs to be approved by an 85% majority vote from its 185 members. The U.S., which has 17% voting power in the fund, essentially holds veto power.
If the plan is approved, the gold selling will be implemented in coordination with major central banks to minimize the impact on the market, the IMF said.
The possible IMF gold sales helped gold prices move lower in the short turn, said Hussein Allidina, an analyst at Morgan Stanley. But he added he sees "any weakness in price as a buying opportunity as the sale would occur over years and be under the CBGA limit."